Date: Oct 14, 2019

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Equity Research Pick of the Week – PCG Research

Leadership position in oleo chemical based additives

Expansion would aid in further growth

Revenues spread across > 650 customers

Fine Organic Industries

INDUSTRY

CMP Buying

RECOMMENDATION ed

Buy Range

SEQUENTIAL TARGETS

TIME HORIZON ed

Specialty Chemicals

Rs. 1696.8

Buy at CMP and add on declines

Rs. 1560 – 1720

Rs. 1918 - 2080 Rs. 1448

4 Quarters

Experienced Management Team, Robust Balance sheet

and Strong Return Ratios

Estimate 17% revenue and 30% EPS CAGR over FY19-21E

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Shareholding Pattern % (Jun 30, 2019)

Promoters 75.0

Institutions 21.2

Non Institutions 3.8

Total 100

HDFC Scrip Code FINORGEQNR

BSE Code 541557

NSE Code FINEORG

Bloomberg FINEORG:IN

CMP Oct 11, 2019 1696.8

Equity Capital (cr) 15.33

Face Value (Rs) 5

Eq- Share O/S (cr) 3.07

Market Cap (Rs cr) 5205

Book Value (Rs) 163

Avg. 52 Wk Volume 15351

52 Week High 1813

52 Week Low 1001

Red flag Price Level 1448

PCG Risk Rating * Yellow

Company profile: Fine Organic Industries was founded in the year 1970 by Mr. Ramesh Shah (a Mumbai-based businessman with experience in chemical trading) and Mr. Prakash Kamat. The company is engaged in the manufacturing of oleo chemical additives for various end-user industries such as foods, plastics, rubbers, paints, inks, cosmetics, coatings, textile auxiliaries, lubes, etc. Currently, the company has manufacturing facilities at three locations in Mah arashtra – Ambernath, Badlapur and Dombivali.

Investment Rationale

The diversified and reputed > 650 client base Experienced Management Team, Strong Balance sheet and Robust Return Ratios Strong in-house research and development facilities Expansion would aid in further growth Lower Penetration of Processed Foods in India Increasing Preference for Non-Toxic Plastic Additives will drive demand for natural derivatives like vegetable

oil-based Oleo chemical derivatives

View and valuation:

The company is one of the six global players in the food additives industry and one of the five global players in the plastic additives industry. The company has a strong balance sheet, robust return ratios such as RoE/RoCE/RoA at 32.6%/28.4%/23% in FY20E. Current realization/tone is ~Rs 153000/tone and EBITDA/tone is ~Rs 33225/tone. Future expansion will be a help to add further growth. We expect that the company will get benefits from the new expansion, long term relationship with clients, strong balance sheet with diversified clients concentration would lead to 17% CAGR in top-line and 30% EPS CAGR over FY19-21E. Moreover, recent corporate tax reform would also boost the profitability for Fine Organic, as the company was paying > 35% taxes in the previous years and which will come down to 25-26%. We recommend BUY on Fine Organic Industries at CMP of Rs 1697 and add on dips to Rs 1560 with sequential targets of Rs 1918 and Rs 2080 over the next 4 quarters. We have assigned 28x FY21E to derive TP of Rs 2080.

FUNDAMENTAL ANALYSTS

Kushal Rughani

[email protected] Devarsh Vakil

[email protected]

Finely poised to become a global player Fine Organics is a top Indian and a key global player in food additives and plastic additives industry. The company has a strong balance sheet, robust return ratios. Its products are gaining prominence as an eco-friendly and sustainable solution in the additives industry. The company is gradually investing around Rs 230cr to expand its capacity by 60% to over 1 lakh tonne per annum. Its strong technological capabilities are helping it gain market share in plastic and food additives industry. It is poised to become a significant global player in next two years.

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Key Highlights

Fine Organic is one of the largest manufacturers of oleo chemical-based additives in India.

The company is one of six global players in the food additives industry and one of

five global players in the plastic additives industry.

The company’s sales are diversified with no customer accounting for more than 5% of the overall sales which means company is not dependent on single

client.

The company has planned to expand

capacity by 52000 MTPA, which will add further growth.

Company has a strong balance sheet and robust return ratios such as RoE / RoCE / RoA at 30%/34%/19% in FY19.

Moreover, recent tax reform would also

boost the profitability, as the company

was paying > 35% taxes in the previous years and which will come down to 25-

26%. This would further boost PAT; estimate ~30% CAGR in PAT over FY19-21E.

Company Background In FY17, Company has merged with Fine Research and Development Centre Private Limited (FRDCPL) and Fine Specialty Surfactants Private Limited (FSSPL). Previously a private limited company, Fine organic was registered as a public limited company in November 2017 and subsequently was publicly listed in July 2018. The company has 69,300 TPA of capacity and produces over 400 specialty additives. Company has four manufacturing facilities in Maharashtra - two at Ambernath, and one each at Badlapur and Dombivali. The company has a presence in 70+ countries, 150+ global distribution networks, 650+ direct customers, 5000+ end consumers, and 2 JV plants in Malaysia and Thailand. Segment-wise revenue contribution - Food additives at ~30%, plastic additives at ~40% and paints, rubber, cosmetics, etc. contribute to ~30%. Products portfolio

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Key Milestones

Investment Rationale

The diversified and well reputed client base In the petrochemical segment, FOIL caters to companies like Reliance Industries Limited, GAIL, Haldia Petrochemicals, SABIC ( Saudi Arabia), Petronas (Malaysia), Braskem (Brazil), Petkim (Turkey), Quapco (Qatar), Exxon Mobil, Dow Chemicals, etc. Further, in the food segment, the company supplies its products to companies like Cadbury, Coca Cola, Britannia, Parle, etc. The company’s sales are diversified with no customer accounting for more than 5% of the overall sales.

Strong financials and robust return ratios The company has grown its revenue at 17% CAGR and net profit at 32% CAGR in FY17-19. Strong return ratios – RoE in the range of 26-30% and RoCE in the band of 30-33% in the past three years.

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Strong in-house research and development facilities The company has a team of 18 scientists and technicians. The company has developed and launched eight new products from 1 April 2019 to Aug-2019.

Expansion would aid in further growth The company has planned to raise capacity by 52000 MTPA, which will add further growth for the company. At the end of FY21, 42,000 MTPA will commence so that total capacity would be 111300 MTPA (69300 MTPA current + 42000 MTPA futures).

Experienced management The company has a strong management team led by Prakash D. Kamat, who has more than four decades’ experience in the oleo chemical -based additives sector.

Lower Penetration of Processed Foods in India

Increasing Preference for Non-Toxic Plastic Additives will Drive Demand for Natural Derivatives like Vegetable Oil-Based Oleo chemical Derivatives

Industry overview

Oleo chemicals are chemicals derived from natural oils and fats of plant origins. Oleo chemicals can be categorized into basic oleo chemicals such as fatty acids, fatty

methyl esters, fatty alcohols, fatty amines and glycerol, and their downstream derivatives obtained from further chemical modifications of these basic oleo chemicals.

Source – Company, DRHP

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Industry The global basic oleo chemical market size was valued at US$ 19.10 billion in 2018 and is estimated to reach US$ 25.9 billion by 2019. The industry is expected to see CAGR of 5.8% between 2019 to 2025. As per Crisil, in the plastic additives, major application in the packaging segment, which contributes to 26%, construction at 20%, consumer goods at 21%, automobiles at 20% and the balance contribute to 13%. This segment in India is expected to grow at 8-10% and estimated to reach at Rs.9000 cr in FY21.

Source - Company, Crisil report

The global food emulsifier market is projected to grow at CAGR of 5.4% to reach US$ 2.49bn by the year 2023 and the Asia-Pacific region continues with dominance. As

per crisil, the food additive segment in India is expected to grow at a CAGR of 10-12% and estimated to reach ~Rs. 900 crore by CY21. Indian Food emulsifier market is

driven by the growing popularity of processed and convenience foods among the working population.

The global cosmetics market is expected to reach US$ 429.8bn by the year 2022 with a CAGR of 4.3%. The Indian cosmetics industry is expected to grow at 10-12%

CAGR over FY17 to 2021-22. The industry is driven by increasing disposable income, rising awareness towards body aesthetics along with demand for herbal cosmetic

products. There is a huge demand coming from the youth population owing to the adoption of Western culture & lifestyle and in creasing number of beauty salons.

Domestic rubber additive demand is expected to grow at CAGR of 6-7% between FY17 and FY2021-22. The paints and coatings industry is expected to grow at 8-10%

CAGR between 2016-17 and 2021-22. There has been a rise in the construction of hotels, shopping malls, high-rise buildings, and infrastructure sector including roads,

bridges.

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One of the largest manufacturers of oleo chemical-based additives in India with strong pedigree; recommend buy with TP of Rs 2080 The company is one of the largest manufacturers of oleo chemical-based additives in India. The company is one of the six global players in the food additives industry and one of the five global players in the plastic additives industry. Product formulations, process technology and customer stickiness to established players work as an entry barrier to the industry. Many end-users typically take three to five years to approve additives, after which the additive manufacturer can supply on a commercial basis. This means that additive end users do source tested additives from established suppliers to avoid expensive and lengthy validation tests. The company has 69,300 TPA of capacity which produces over 400 specialty additives. The company has a presence in 70+ countries, 150+ global distribution networks, 650+ direct customers, 5000+ end consumers, and 2 JV plants in Malaysia and Thailand. The company has a strong balance sheet, robust return ratios such as RoE/RoCE/RoA at 32.6%/28.4%/23% in FY20E. Current realization/tone is ~Rs 153000/tone and EBITDA/tone is ~Rs 33225/tone. Future expansion will be a help to add further growth. We expect that the company will get benefits from the new expansion, long term relationship with clients, strong balance sheet with diversified clients concentration would lead to 17% CAGR in top-line and 30% EPS CAGR over FY19-21E. Moreover, recent tax reform would also boost the profitability for Fine Organic, as the company was paying ~35% taxes in the previous years and which will come down to 25-26%. We recommend BUY at CMP of Rs 1697 and add on dips to Rs 1560 with sequential targets of Rs 1918 and Rs 2080 over the next 4 quarters. We have assigned 28x FY21E to derive TP of Rs 2080. Key Risks

The key raw materials are vegetable oil, palm oil, and palm oil-based derivatives, the prices of which have been volatile. These may in turn hurt margins High supplier concentration

Currency volatility and raw material price fluctuations pose key risks

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Revenue Trend

Source: Company, HDFC sec Research

668 778 852 1060 1198 1450

8.0

16.6 9.4

24.5

13.021.0

0

5

10

15

20

25

30

300

600

900

1200

1500

FY16 FY17 FY18 FY19 FY20E FY21E

Rs

Cr

Revenue Growth (%)

EBITDA and EBITDA Margin over FY19-21E


154 145 158 230 257 314

23.3

18.6 18.6

21.7

21.521.7

0

5

10

15

20

25

0

50

100

150

200

250

300

350


Rs

Cr

EBITDA Margin%

PAT trend over FY19-21E


84 8395

136

190

232

0

50

100

150

200

250


Robust Return Ratios (%)


28.526.3

30.432.6

30.432.9

30.833.6

28.4 29.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

FY17 FY18 FY19 FY20E FY21E

RoE RoCE

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Net Fixed Asset Turnover (x)


4.9 5.2

6.6

7.7

9.6

0

2

4

6

8

10

12

FY15 FY16 FY17 FY18 FY19

Revenue Split (%)


45

55

Domestic

Exports

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Income Statement (Rs Cr) FY17 FY18 FY19 FY20E FY21E

Net Revenue 778 852 1060 1198 1450

Growth (%) 16.6 9.4 24.5 13.0 21.0

Operating Expenses 633 693 830 941 1136

EBITDA 145 158 230 257 314

Growth (%) -5.8 9.3 45.4 11.7 22.0

EBITDA Margin (%) 18.6 18.6 21.7 21.5 21.7

Depreciation 23.7 20.0 17.5 22.2 28.3

EBIT 121 138 213 235 286

Interest 4.4 3.2 1.8 2.7 2.6

Other Income 4.0 16.0 19.8 21.8 27.0

PBT 121 151 231 254 310

Tax 42.9 55.9 94.5 64.0 78.0

APAT 77.9 95.3 136.3 189.1 230.0

Growth (%) -0.7 14.8 42.9 38.8 21.6

EPS 27.1 31.1 44.4 61.7 75.0 Source: Company, HDFC Sec Research

Balance Sheet

As at March FY17 FY18 FY19 FY20E FY21E

SOURCE OF FUNDS

Share Capital 4.8 15.3 15.3 15.3 15.3

Reserves 323 380 485 645 841

Money Received 0 0 0 0 0

Shareholders' Funds 328 396 500 660 856

Long Term Debt 0 0 0 15 0

Long Term Provisions & Others 0 0 4 4 5

Total Source of Funds 328 396 504 679 861

APPLICATION OF FUNDS

Net Block 100 120 184 304 354

Non-Current Investments 11 11 10 0 0

Deferred Tax Assets (net) 4 5 0 0 0

Long Term Loans & Advances 49 60 74 78 86

Total Non Current Assets 164 196 268 383 441

Current Investments 0 0 0 0 0

Inventories 92 89 89 113 142

Trade Receivables 110 146 156 177 211

Short term Loans & Advances 54 79 80 100 120

Cash & Equivalents 18 12 109 133 157

Other Current Assets 6 3 0 0 0

Total Current Assets 281 330 434 523 630

Short-Term Borrowings 40 54 128 148 115

Trade Payables 64 70 53 62 77

Other Current Liab & Provisions 12 4 5 5 6

Short-Term Provisions 0 3 12 12 12

Total Current Liabilities 116 130 198 227 210

Net Current Assets 164 200 236 296 420

Total Application of Funds 328 396 504 679 861 Source: Company, HDFC Sec Research

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Cash Flow Statement

(Rs Cr) FY17 FY18 FY19 FY20E FY21E

Reported PBT 126 151 231 254 310

Non-operating & EO items -4 -16 -20 -22 -27

Interest Expenses 4 3 2 3 2

Depreciation 24 20 17 22 28

Working Capital Change -104 -41 61 -36 -100

Tax Paid -43 -56 -95 -64 -78

OPERATING CASH FLOW ( a ) 4 62 196 157 136

Capex 8 -40 -82 -142 -78

Free Cash Flow 11 22 115 15 58

Investments -27 -12 -8 5 -8

Non-operating income 4 16 20 22 27

INVESTING CASH FLOW ( b ) -15 -35 -70 -115 -59

Debt Issuance / (Repaid) 0 0 4 15 -15

Interest Expenses -4 -3 -2 -3 -2

FCFE 7 19 117 28 41

Share Capital Issuance 0 11 0 0 0

Dividend 0 -26 -26 -31 -36

FINANCING CASH FLOW ( c ) -5 -19 -24 -18 -52

NET CASH FLOW (a+b+c) -16 7 102 24 24 Source: Company, HDFC Sec Research

Key Ratios

(Rs Cr) FY17 FY18 FY19 FY20E FY21E

Profitability (%)

EBITDA Margin 18.6 18.6 21.7 21.5 21.7

EBIT Margin 15.6 16.2 20.1 19.6 19.7

APAT Margin 10.7 11.2 12.9 15.9 16.0

RoE 28.5 26.3 30.4 32.6 30.4

RoCE 32.9 30.8 33.6 28.4 29.2

Solvency Ratio

D/E 0.1 0.1 0.3 0.2 0.1

Interest Coverage 27.6 43.9 115.7 89.8 121.0

PER SHARE DATA

EPS 41.6 44.6 44.4 61.7 75.1

CEPS 110.5 37.6 50.1 69.0 84.3

BV 680 129 163 215 279

Dividend 0.0 7.0 7.0 8.0 9.0

Turnover Ratios (days)

Debtor days 52 63 54 54 53

Inventory days 39 39 31 34 36

Creditors days 43 45 35 32 33

Working Capital Days 49 57 50 56 56

VALUATION

P/E 63.4 55.3 38.5 27.7 22.8

P/BV 2.5 13.3 10.5 8.0 6.2

Dividend Yield 0.0 0.4 0.4 0.5 0.5 Source: Company, HDFC Sec Research

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Ratings Chart

R E T U R N

HIGH

MEDIUM

LOW

LOW MEDIUM HIGH

RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

BLUE LOW RISK - LOW RETURN STOCKS

IF RISKS MANIFEST PRICE CAN FALL 20%

OR MORE

IF RISKS MANIFEST

PRICE CAN FALL 15% & IF INVESTMENT

RATIONALE FRUCTFIES

PRICE CAN RISE BY 15%

IF INVESTMENT RATIONALE FRUCTFIES

PRICE CAN RISE BY 20% OR MORE

YELLOW MEDIUM RISK - HIGH RETURN STOCKS


OR MORE

IF RISKS MANIFEST PRICE CAN FALL 20% &




PRICE CAN RISE BY 35% OR MORE

RED HIGH RISK - HIGH RETURN STOCKS


OR MORE

IF RISKS MANIFEST PRICE CAN FALL 30% &




PRICE CAN RISE BY

50% OR MORE

# Explanation of Red-flag Price level: If stock prices starts sustaining below red-flag level, the premise of the investment needs to be reviewed. Risk averse

investors should exit the stock and preserve capital. The downside of following red-flag level is that if the price decline turns out to be temporary and if

it recovers subsequently, one won’t be able to participate in the gains.

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Price Chart

400

800

1200

1600

2000

Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year.

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Disclosure:

We, Kushal Rughani / Devarsh Vakil, MBA / MBM authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately re flect our views about the subject

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Any holding in stock –No

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Date: Oct 14, 2019 - HDFC securities

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